What do you have to prove to win a fraud claim in a New York business case?

This page explains New York law on common law fraud between businesses, drawn from the decisions of the New York Court of Appeals and the Appellate Division and from the Civil Practice Law and Rules (CPLR). KOR Law LLP's commercial litigation practice handles common law fraud and negligent misrepresentation claims for plaintiffs and defendants. The firm also practices in New Jersey, but this page addresses New York law only.

What are the elements of fraud in New York?

The Court of Appeals states the test in a single sentence: "The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages" (Eurycleia Partners, LP v Seward & Kissel, LLP, 2009). The court restated them in Mandarin Trading Ltd. v Wildenstein (2011) and in Pasternack v Laboratory Corp. of Am. Holdings (2016), which described the modern claim as requiring, in addition to damage, "a material misrepresentation or omission, inducement, and reliance."

Two refinements matter in business disputes:

• Opinions are not facts. In Mandarin Trading, an art appraisal letter estimating a painting's value was "nonactionable opinion that provided no basis for a fraud claim."
• Silence needs a duty. A claim built on what the other side did not say (fraudulent concealment) also requires a duty to disclose. In Mandarin Trading the court quoted the Appellate Division's rule that concealment requires "an allegation that the defendant had a duty to disclose material information and that it failed to do so," and in Eurycleia the court found no such duty in the absence of a fiduciary relationship.

How does a business fraud case move through a New York court?

1. Check the deadline. A fraud action must be started within six years of when the claim accrued or two years from when the fraud was discovered, or could with reasonable diligence have been discovered, whichever is greater (CPLR 213(8); see also CPLR 203(g)). The deadlines for related claims are compared in how long you have to sue for breach of contract, fraud, or a sale of goods in New York.
2. Choose the court. A business fraud case for money damages can be brought in New York State Supreme Court, and larger disputes may qualify for the specialized part described in whether your business dispute belongs in the New York Commercial Division. Some can be filed in federal court instead.
3. Plead the fraud in detail. CPLR 3016(b) requires that "the circumstances constituting the wrong shall be stated in detail." The Court of Appeals reads that rule as satisfied when the facts alleged permit a "reasonable inference" of the misconduct (Eurycleia, discussing Pludeman).
4. Expect a motion to dismiss. Defendants commonly move under CPLR 3211(a)(1), a defense founded on documentary evidence, 3211(a)(5), which includes a release, and 3211(a)(7), failure to state a cause of action. The document relied on is often a disclaimer (Basis Yield, 2014) or a signed release (Centro, 2011).
5. Discovery. If the claim survives, the parties exchange documents and take depositions. The rules that govern how much is allowed in the Commercial Division are covered in what discovery limits apply in the New York Commercial Division.
6. Summary judgment or trial. At the proof stage, the Appellate Division has held that "a party alleging fraud in the inducement bears the burden of proving the elements thereof 'by clear and convincing evidence'" (State of New York v Industrial Site Servs., 3d Dept 2008).

Fraud cases sometimes involve money that is moving out of reach. CPLR 6201(3) allows an order of attachment where a defendant, with intent to defraud creditors or frustrate a future judgment, has disposed of, encumbered or hidden property, or is about to. How quickly emergency relief can be obtained is explained in how fast you can get a TRO or preliminary injunction in a New York business dispute.

When is reliance "justifiable"?

Three Court of Appeals decisions frame the reliance element.

You must use the means available to you. The court has applied a rule dating to 1892: if the facts are not "peculiarly within" the other side's knowledge and the plaintiff could learn the truth "by the exercise of ordinary intelligence," it must use those means or it "will not be heard to complain" (DDJ Mgt., LLC v Rhone Group L.L.C., 2010, quoting Schumaker v Mather). When a party has "hints of its falsity," a "heightened degree of diligence is required" (ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 2015, quoting Centro).

A written representation can substitute for your own investigation. In DDJ Mgt., lenders who had not examined the borrower's underlying records had insisted on representations and warranties that the financial statements were accurate. The court held that "where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry," and left the question for the trier of fact.

Only the plaintiff's own reliance counts. In Pasternack the court declined "to extend the reliance element of fraud to include a claim based on the reliance of a third party, rather than the plaintiff." A statement made to a regulator, a lender or a customer, rather than to you, generally will not support your fraud claim unless it was meant to be passed on to you and you relied on it.

Can a contract clause or a release stop a fraud claim?

Often, yes. The Appellate Division, First Department, summarized the rule in Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc. (2014): a disclaimer of reliance bars a fraud claim only if "(1) the disclaimer is made sufficiently specific to the particular type of fact misrepresented or undisclosed; and (2) the alleged misrepresentations or omissions did not concern facts peculiarly within the seller's knowledge." A general clause therefore does less work than one that names the very subject of the alleged misstatement.

The Court of Appeals applied the same idea between business co-owners in Pappas v Tzolis (2012). Departing LLC members had signed a certificate stating they were "not relying on any representation" by the buying member, and their fraud claim was dismissed because they had disclaimed reliance on "the very matter" they later said was misrepresented. Co-owner disputes that lead to a buyout raise this issue constantly, as discussed in whether a minority shareholder can force a buyout or dissolution in New York.

Releases work similarly. In Centro Empresarial Cempresa S.A. v América Movil (2011) the Court of Appeals held that "a party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release," and that a sophisticated party can release its fiduciary where the relationship is "no longer one of unquestioning trust."

Is it fraud, or just a breach of contract?

Courts police this line closely. In Cronos Group Ltd. v XComIP, LLC (2017), the First Department dismissed a fraud claim that only alleged false assurances that the other side would perform its contract, holding that a fraud claim is not stated by allegations that "simply duplicate, in the facts alleged and damages sought, a claim for breach of contract." Quoting earlier First Department decisions, Cronos treats a fraud claim as duplicative when it rests on the same facts as the contract claim, is not collateral to the contract, and seeks no damages beyond what a contract measure would allow. A promise about the future supports fraud only with facts showing the promisor never intended to keep it when made.

The overlap is common in sales of goods, where a seller's statements about product quality may also be express warranties. The contract side of that kind of dispute is covered in what rules govern a dispute over a sale of goods between businesses in New York.

What damages can you recover for fraud?

New York follows the "out-of-pocket" rule. Quoting its earlier decision in Lama Holding, the Court of Appeals explained in Connaughton v Chipotle Mexican Grill, Inc. (2017) that damages "are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained," and that "there can be no recovery of profits which would have been realized in the absence of fraud." A lost business opportunity is "not a recoverable out-of-pocket loss," and nominal damages are not available because actual harm is an element of the claim (Connaughton).

Collecting is a separate stage, explained in what happens after a money judgment is entered in New York.

What changes the answer?

• Who received the statement. Reliance by a third party does not satisfy the element (Pasternack, 2016).
• Fact or opinion. Valuations, projections and puffery are usually opinion, not fact (Mandarin Trading, 2011).
• Written representations and warranties. Bargained-for warranties can make reliance justifiable without your own audit (DDJ Mgt., 2010).
• The disclaimer's wording. Only a disclaimer specific to the matter misrepresented bars reliance, and not for facts peculiarly within the other side's knowledge (Basis Yield, 2014; Pappas, 2012).
• Releases. A signed release of fraud claims can be challenged as fraudulently induced only by showing a separate fraud (Centro, 2011).
• Sophistication and warning signs. Hints of falsity require more diligence (ACA, 2015; Centro, 2011).
• A duty to disclose. Concealment claims need a fiduciary or similar duty (Eurycleia, 2009; Mandarin Trading, 2011).
• Timing. Six years, or two years from discovery, whichever is greater (CPLR 213(8), 203(g)).

One caution on vocabulary: a "fraudulent conveyance" is a different claim. It lets a creditor undo transfers made to avoid paying debts, and it is explained in whether a creditor can undo a property transfer as a fraudulent (voidable) conveyance in New York.

For example: a business bought on inflated revenue figures

Common mistakes

• Pleading in generalities. A complaint that says "defendants lied" without the who, what and when invites dismissal under CPLR 3016(b) (Eurycleia).
• Relabeling a contract claim. A fraud count that only alleges an unkept promise to perform the contract is dismissed as duplicative (Cronos).
• Ignoring the disclaimer and release. Read every closing document, side letter and certificate before suing; a specific non-reliance clause can end the case (Pappas; Basis Yield).
• Claiming lost profits. Fraud damages cover out-of-pocket loss, not the benefit you expected (Connaughton).
• Relying on what someone else was told. Statements made to a third party generally do not establish your reliance (Pasternack).
• Waiting on the discovery clock. The two-year discovery period runs from when the fraud could with reasonable diligence have been discovered, not only from actual knowledge (CPLR 213(8)).

What to do this week

1. Write a timeline of each statement: who made it, to whom, when, and in what form.
2. Collect the deal documents, including disclaimers, releases, certificates and representations and warranties.
3. Preserve emails, texts, spreadsheets and data room records.
4. Calculate what you actually paid or lost because of the statement, separately from expected profits.
5. Note when you first learned or had reason to suspect the truth, to measure the deadline.
6. Check whether the other side is moving or hiding assets, which may call for emergency relief.

Frequently asked questions

Is negligent misrepresentation easier to prove than fraud?

It does not require knowledge of falsity, but it requires something fraud does not: "a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff," plus incorrect information and reasonable reliance (Mandarin Trading, 2011).

Can the owners of a company be liable, not just the company that signed the contract?

Potentially. In DDJ Mgt. the warranties were given only by the borrower, but the court held that if the controlling owners knew the warranted financial statements were false, a fraud claim against them could proceed. A breach of warranty claim alone would run only against the signer.

Does a co-owner have to tell me everything before buying my interest?

A fiduciary relationship can create a duty to disclose (the duties co-owners owe are set out in what duties business partners and LLC managers owe each other in New York), but sophisticated parties can release it. In Pappas v Tzolis the court enforced a release and non-reliance certificate where the relationship had become antagonistic. Warning signs that a co-owner relationship is breaking down are covered in the warning signs that a partnership or LLC dispute is headed to court.

Can a fraud claim be dismissed before any discovery?

Yes. Pleading detail, disclaimers and releases are tested on a motion to dismiss, as in Eurycleia, Centro and Pappas (CPLR 3211). Reliance, though, "is not generally a question to be resolved as a matter of law on a motion to dismiss" (ACA, 2015).

Should a business fraud case be filed in federal court?

Only if federal jurisdiction exists, and the choice affects pleading practice, speed and appeals. The considerations are compared in federal court or state court: where a New York business dispute should be filed.

Can I recover nominal damages if the lie was clear but my loss is hard to measure?

No. Because actual harm is an element of fraudulent inducement, the Court of Appeals held that nominal damages are not available (Connaughton, 2017). The loss must be an actual, out-of-pocket one.